Goldman Sachs Trades Cash Bonuses for Stock Restrictions

Goldman CEO: "Our compensation policies are the strongest in our industry."

November 18, 2009, 10:27 AM

Dec. 10, 2009 — -- Goldman Sachs, the Wall Street firm often at the center of outrage over multibillion-dollar employee compensation practices, said today that its top 30 managers will receive no cash for their 2009 bonuses and instead be awarded stock that can't be sold for five years.

The stock, Goldman said, can be "clawed back" -- taken back by the firm -- if it is determined that the executive took excessive risks.

Historically, these managers would have received more than half of their year-end compensation in stock and the remainder in cash. The stock would fully vest most often over a period of three years. Now, the entire bonus for this year will be stock and vest over a longer period.

The bank said it was expanding on principles it presented last spring at its annual shareholder meeting to align long-term performance with managers' compensation and to discourage short-term, risk-taking activities that could damage the firm.

"We believe our compensation policies are the strongest in our industry and ensure that compensation accurately reflects the firm's performance and incentivizes behavior that is in the public's and our shareholders' best interests," Goldman CEO Lloyd Blankfein said in a written statement today.

In addition, shareholders will have for the first time an advisory vote on Goldman's compensation principles and the compensation of the five highest paid executives which include the CEO and the chief financial officer. Congress has been considering legislation that would provide a similar vote for shareholders of other firms.

James Reda, who manages an independent compensation consultancy that has done work for Goldman Sachs, said shareholders will benefit from the changes not only because they will have a "say on pay" but also because by preventing the sale of stock for five years, the bank will likely retain key employees.

"I think it's a very good compromise," he said "It is a very well thought out response that they didn't have to do, but they felt they wanted to be a leader and not a follower."

A Political Move?

Goldman Sachs, which received and later paid back $10 billion in funds from the federal Troubled Asset Relief Program during the financial crisis, has set aside $16.7 billion for employee compensation in the first nine months of this year and is on track to pay out an average $700,000 per employee.

Concerned about a possible backlash over large bonuses only a year after the federal government rescued the financial system from collapse, representatives from Goldman Sachs have recently met with some of its largest shareholders to explain the firm's compensation principles. Corporate governance experts said the firm is also keeping an eye on Congress after last winter's thrashing of AIG for paying retention bonuses.

"One of the reasons Goldman has been successful is that it is good at paying attention to political climate and so I think there is a recognition that people are pretty upset about what they are reading," said Jonathan Koppell, a management professor at Yale and the director of the Working Group on Global Governance.

Paying year end compensation for these thirty employees in stock versus cash, said Kopppell, is "obviously a political move." He added, "It also seems to me that it is a recognition that the compensation structure was an issue."

Today's announcement comes several weeks after Goldman made two other major moves that critics suspect were designed to rehabilitate the firm's battered image.

Goldman said last month it would join forces with billionaire investor and Goldman stakeholder Warren Buffett on "10,000 Small Businesses."

The program will provide capital to small businesses in underserved areas and education aid to small business owners. The $500 million small business program amounts to less than 3 percent of Goldman's employee compensation pool.

Goldman Apology

On the same day of Goldman's small business announcement, Goldman CEO Blankfein generated headlines for remarks he made at a corporate conference. Blankfein, who drew criticism earlier in the month for saying Goldman was doing "God's work," offered an apology for mistakes the bank made in the lead-up to the financial crisis.

"We participated in things that were clearly wrong and have reason to regret," Blankfein said during his remarks at the National Association of Corporate Directors in New York City, where he was honored as CEO of the year. "We apologize."

The federal government has trumpeted restricted stock awards as a way to ensure financial firm employees don't take the kinds of excessive risks that helped plunge the world into a financial crisis last year.

Steven Hall, a New York-based executive compensation consultant with Steven Hall & Partners, said the changes announced by Goldman were substantive. Hall said the new compensation plan sent a message to the top managers that the bank will "hold your feet to the fire and make sure we run this company in the right way for shareholders and everyone else involved in it."

The changes, however, also reflect the bank's attempt to deflect potential criticism of how much the executives are eventually paid.

"If you see huge payouts to these people, and huge is always relative for investment bankers," Hall said, "you may get some push back or criticism from people upset that the government came along and bailed them out and now the executives are making a lot of money after the fact."

"It is a better form of compensation as it does link employees more to other shareholders, but the fact still is they are still paying out significant amounts of money to the employees," said Charles Elson, the director of the corporate governance center at the University of Delaware.

Critics Maintain Goldman Isn't Doing Enough

Elson said the bank is trying to make compensation more palatable for the general public, but in the end, millions in stock or cash or both is still millions of dollars and the public and politicians may not see the difference.

"I think they still have reason to be concerned," he said.

Count Anna Burger among those still concerned.

Burger, the secretary-treasurer of the Service Employees International Union, a staunch critic of the investment bank, said she wasn't impressed by Goldman's compensation announcement.

"If Goldman thinks that's going to make taxpayers, workers or their shareholders happy, I think they have another thing coming," she said today.

The firm, she said, hasn't done enough to fight unemployment and home foreclosures.

"We bailed them out, we helped them turn their business around," she said. "They're now making profits and they've done nothing for America."

ABC News' Alice Gomstyn and Zunaira Zaki contributed to this report.